IMF says some Asian currencies undervalued

SINGAPORE--China, Malaysia and Thailand's currencies are undervalued relative to the economies' medium-term fundamentals, and the countries in question should focus on fiscal policy to support growth, the International Monetary Fund said Tuesday.

In its World Economic Outlook, the IMF found that while foreign exchange movements since the global financial crisis had been consistent with demand rebalancing, gains in currencies of nations with external surpluses had halted over the past eight months.

It warned that continued accumulation of international reserves was contributing to global imbalances and associated weaknesses, and said these were likely to remain above desirable levels in the absence of decisive action by governments.

"It must be emphasized that the policies that would most effectively lower global imbalances and related vulnerabilities serve the self-interests of the countries concerned, even when considered purely from a domestic viewpoint," the IMF said.

While countries with external deficits may need strong medium-term fiscal consolidation programs, "the requirements for emerging market economies with external surpluses and undervalued currencies are to cut back official reserve accumulation, adopt more market-determined exchange systems, and implement structural reforms, for example, to broaden the social safety net."

The current accounts of many Asian nations, including China, Malaysia, Singapore, South Korea and Thailand, are stronger and the currencies weaker than they would be with a more desirable set of policies, the IMF said, adding that several of them have very large official reserves or internal distortions that curb consumption.

While inflation rates in emerging Asia have been low or falling, in China and India credit has expanded rapidly, and in Indonesia and to some extent Malaysia, credit growth is still quick, with property prices also booming in some of those markets. In addition, China, Malaysia and Thailand's currencies are undervalued relative to the countries' medium-term fundamentals, the IMF said.

"Considering this credit and exchange rate picture, these countries should wait and see or consider modest further easing of monetary policy stances and rely mainly on fiscal policy to support demand," the IMF said. "Those with less fiscal space could proceed to more monetary easing, provided macroprudential measures keep credit growth in check."

The fund advised India and Vietnam not to loosen monetary policy in the absence of fiscal tightening steps to cool domestic demand. In both countries, as well as Japan, credible fiscal consolidation should be a policy priority, it said.

The IMF tips gross domestic product in developing Asia to grow 6.7% this year in inflation-adjusted terms, picking up to 7.2% in 2013, 0.4 percentage point and 0.3 point weaker than its July forecasts.

In China, it expects growth of 7.8% in 2012 and 8.2% in 2013, with both forecasts being 0.2 point weaker than the IMF's July view.

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